What is one reason a DCF valuation might be higher than an LBO valuation?

In a discounted cash flow (DCF) valuation, the focus is on the company's intrinsic value based on its expected future cash flows, which can be more favorable when growth is anticipated. This expectation often involves reinvesting cash flows back into the business to fuel that growth. In contrast, a leveraged buyout (LBO) valuation typically relies more heavily on the company's ability to generate cash flow for debt repayment.

One crucial aspect of LBOs is the significant amount of debt used to finance the acquisition, which requires substantial cash flow to service interest payments and principal repayments. This commitment to debt repayment limits the cash flow available for valuations, which can result in a lower valuation compared to a DCF where there are fewer constraints on how cash can be deployed. Consequently, the DCF valuation may reflect a greater potential for value creation through reinvestment and growth, leading to a higher valuation than that derived from an LBO analysis.